Once again, gold stocks are struggling. The VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDJX) both have dropped about 13% from January highs. Both ETFs are down YTD as well — with performance lagging the S&P 500.
More concerningly, once again, the sector is underperforming gold itself. Gold has dropped less than 1% so far this year, and only pulled back about 5.5% from its highs.
And so the long-running problem with gold stocks remains. As I pointed out when discussing Barrick Gold Corp (USA) (NYSE:ABX) back in April, miners are supposed to provide leverage to the price of gold. That simply hasn’t happened, particularly over the last few years.
While Barrick has been the worst performer, gold majors have disappointed across the board. Since the beginning of 2010, gold has risen 14%. The GDX has dropped 52%; the GDXJ has fallen 68%.
Past performance doesn’t guarantee future results, of course. And the miners are trying to reverse the trend, paying down debt, pulling back on M&A, and focusing on higher-quality jurisdictions. Still, I’m a long way from trusting the larger miners like Barrick, Goldcorp Inc. (USA) (NYSE:GG), Kinross Gold Corporation (USA) (NYSE:KGC), and AngloGold Ashanti Limited (ADR) (NYSE:AU).
That said, there are a few small-cap miners that have some potential. The path to upside is a bit more difficult given the majors’ promises to pull back on M&A — at least for the time being. That said, I’d rather gamble on smaller plays — particularly those in safer jurisdictions — than larger counterparts. And for investors bullish on gold, these 3 stocks could be set to reverse the trend across the space.
3 Gold Stocks That Could Bounce: Royal Gold (RGLD)
Royal Gold, Inc (USA) (NASDAQ:RGLD) is what’s known as a ‘streaming’ play. The company acquires royalty streams for mine operators, offering upfront cash for years of royalty payments.
RGLD isn’t the only streaming play — or even the biggest. Franco Nevada Corp (NYSE:FNV) is bigger. Wheaton Precious Metals Corp (NYSE:WPM) is more diversified (the company used to be known as Silver Wheaton). But RGLD looks most attractive at the moment.
RGLD doesn’t look particularly expensive, at about 13x trailing free cash flow. (Earnings multiples look much higher, but that’s more of an accounting issue). And that’s even with a couple of near-term issues. Barrick’s issues at Pascua Lama are hitting RGLD’s royalty stream there. And Centerra Gold Inc. (OTCMKTS:CAGDF) is having continuing problems at its Mt. Milligan mine in Canada.
But Centerra should start contributing next year, and Royal Gold has a nicely diversified portfolio, with plenty of revenue coming from elsewhere. The company has raised its dividend for 17 straight years, and the streaming space as a whole has been one of the few bright spots in the mining sector.
Higher gold prices would drop straight to the bottom line and should drive RGLD even higher. But even with stable gold prices, Royal Gold has a strong enough portfolio to drive solid cash flow — and a solid enough balance sheet to find more attractive opportunities.
3 Gold Stocks That Could Bounce: IAMGOLD (IAG)
IAMGOLD Corp (NYSE:IAG) already has bounced nicely. Despite the decline in the sector, IAG actually is up slightly so far this year, and has climbed more than 20% from mid-March lows.
There could be more gains on the horizon. Q1 earnings were solid, leading the stock higher and showing some promise for IAG’s long-term plans. Production is guided to increase in the second half. Costs are falling and should fall further.
Those two trends should support near-term results, with Q1 setting up IAG for a strong 2018. Longer-term, there’s reason for optimism as well. The company’s Saramacca deposit, near an existing mine in Suriname, was termed a “game changer” by one analyst. Pre-feasibility studies led to an 86% increase in proven and probable gold reserves last year.
And with IAG still trading basically at book value, and only a modest premium to NPV, the valuation suggests more potential upside. This is one of the smaller miners with the biggest growth potential, and one of the gold stocks worth taking a gamble on.
3 Gold Stocks That Could Bounce: Tahoe Resources (TAHO)
Tahoe Resources Inc (NYSE:TAHO) is a gold pure play — for now. But it’s a potential restart of the company’s Escobal silver mine in Guatemala that could give TAHO a boost.
To be sure, TAHO is a high-risk play. It’s already dealing with the same political difficulties that have derailed a number of gold stocks. The Escobal mine has been shut down amid protests. A strike at a gold mine in Peru finally ended last month.
But Escobal should reopen, pending approval from Guatemala’s Constitutional Court. That will give a boost to free cash flow. Meanwhile, the company is guiding for gold production to climb nicely through 2020 — and for costs to fall at the same time.
Again, there are risks here. A court loss in Guatemala would provide a blow to the stock. But if TAHO can get back on track, there’s room for real upside. TAHO trades at a discount to book value. The balance sheet is clean. The La Arena II project in Peru could support as much as half of the current market cap, based on the current NPV. After a disastrous run — TAHO has lost over 80% of its value since mid-2014 — some good news could be in sight for Tahoe Resources.
As of this writing, Vince Martin has no positions in any securities mentioned.